Baht Outlook Dims as Amnesty Bill Sparks Unrest: Southeast Asia

The baht dropped 0.8 percent against the dollar and the SET index of shares fell 4 percent since Oct. 18, when the amnesty bill was expanded to include state officials and people accused of crimes by agencies set up after the 2006 coup that ousted Prime Minister Thaksin Shinawatra. Photographer: Dario Pignatelli/Bloomberg

Nov. 8 (Bloomberg) -- The prospect of a sustained bout of
political unrest in Thailand is stoking concern the baht,
already Asia’s worst performer this quarter, will extend losses.

The currency will fall 2 percent by Dec. 31 to 32 per
dollar, according to Australia & New Zealand Banking Group Ltd.,
the most accurate baht forecaster over the last four quarters.
Overseas investors have pulled almost $1 billion from Thai
stocks and bonds since the beginning of last week as a proposed
amnesty law for political offenses triggered demonstrations. BBL
Asset Management Co., which runs seven of the 10 best Thai
equity funds, said it had been selling shares since mid-October.

Anti-government protests in 2010 led to clashes that left
more than 90 people dead and renewed tensions may curb tourism
and investment in an economy that’s growing at the slowest pace
in Southeast Asia. The Senate is set to reject the bill later
today. Thailand ran current-account deficits in five of the last
six months, and the demonstrations may damp demand ahead of
dollar bond sales promoted by Finance Minister Kittiratt Na-Ranong to fund infrastructure spending.

“Thailand is now running a current-account deficit and
economic activity is somewhat weak,” Khoon Goh, a Singapore-based strategist at ANZ, said in a Nov. 4 interview. “Those are
reasons enough for the baht to weaken and political uncertainty
at the moment is another additional headwind.”

Senate Rejection

The baht dropped 1 percent against the dollar and the SET
index of shares fell 5 percent since Oct. 18, when the amnesty
bill was expanded to include state officials and people accused
of crimes by agencies set up after the 2006 coup that ousted
Prime Minister Thaksin Shinawatra. The Thai exchange rate fell
0.2 percent to 31.37 this quarter, the only decliner among
Asia’s 11 most-traded currencies apart from the Indian rupee.

Prime Minister Yingluck Shinawatra, Thaksin’s sister,
struggled to convince the public that the bill aimed to heal
social divisions caused by the coup rather than help Thaksin
return to Thailand and recover part of a fortune that was seized
after he fled a jail term in 2008.

The upper house will reject the bill, Senate Speaker Nikon
Wairatpanij said Nov. 5, following demonstrations the previous
day that saw more than 32,000 people rally on the streets of
Bangkok, according to police estimates. If the bill is rejected,
it would go back to the lower house for 180 days.

Yingluck called on anti-government groups yesterday to end
protests after agreeing to their demand to scrap the
controversial bill. The parliament scrapped six amnesty
proposals yesterday, and the Senate is scheduled to vote on a
seventh at 2 p.m. today. She has said the government won’t seek
to revive the draft law if it is rejected by the Senate.

“Legally, the bill is still alive despite the Senate’s
rejection vote,” Suthep Thaugsuban, a Democrat party member of
parliament and a leader of the rally, told the demonstrators
yesterday.

Former Prime Minister Abhisit Vejjajiva told a rally on
Nov. 5 that he will continue to fight until the legislation is
scrapped, adding that the blockage by the Senate doesn’t mean
the bill is abandoned.

Growth Impact

“The political tension in Thailand remains in play,”
Sacha Tihanyi, a Hong Kong-based senior currency strategist at
Scotiabank, the third-most accurate forecaster of Asian
emerging-market currencies in the last four quarters, wrote in a
Nov. 6 research note. “The issue could be set to drag on, with
subsequent protests and political wrangling continuing,” he
wrote, adding his year-end baht forecast is 31.3 per dollar.

A prolonged tussle will harm tourism and private investment
and could shave 0.5 percentage points from gross domestic
product in 2014, according to a Nov. 4 BNP Paribas SA research
note.

Thai economic growth slowed to 2.8 percent in the second
quarter from a year earlier, after an expansion of 5.4 percent
in the preceding three months, official data show. The Bank of
Thailand cut its 2013 growth estimate to 3.7 percent from a July
projection of 4.2 percent on Oct. 25. The current-account
shortfall was $6.1 billion in the first nine months, compared
with last year’s $1.5 billion deficit, central bank data show.

Political Risks

The Bloomberg-JPMorgan Asia Dollar Index, which tracks
regional currencies against the greenback, rose 2 percent in
September and October as the Federal Reserve refrained from
tapering stimulus that has buoyed emerging-market assets.

“We have struggled to turn positive on the baht even
against the improved September-October emerging-market
backdrop,” Sameer Goel, Singapore-based head of Asia rates and
foreign-exchange research at Deutsche Bank AG, the world’s
biggest currency trader, said in a Nov. 4 interview. “Growth
momentum is very weak and political risks could flare up.”

Thai government bond yields will fall should the unrest
persist, as the Bank of Thailand will be less likely to raise
borrowing costs, according to a DBS Group Holdings Ltd. research
note released Nov. 5. The central bank has held its key rate at
2.5 percent since May, after cutting by one percentage point
over the previous 18 months.

Dollar Bonds

The yield on the 3.625 percent notes due June 2023 fell
five basis points, or 0.05 percentage point, this week to 3.97
percent, paring its increase to 22 basis points since the end of
June, according to data compiled by Bloomberg. The 10-year rate
dropped 56 basis points in the three months through May 2010,
when the last major violence occurred.

Yingluck’s government raised minimum wages last year and
introduced a program in 2011 to buy rice at above-market prices
to boost rural incomes. The World Bank estimated in October that
the program cost the government around 200 billion baht ($6.4
billion) a year.

Thailand is planning to tap the dollar bond market for the
first time since 2006 next year, targeting $1 billion to $1.5
billion of issuance, Chularat Suteethorn, director-general of
the Public Debt Management Office, said Nov. 5 in Bangkok. The
money will be used for infrastructure projects and the timing of
the sale will be dependent on whether the political tensions
abate, she said.

‘Political Baggage’

“Political uncertainty does weigh on government finances,
in that in order to win public support the government adopts
populist policies that are not well-managed,” Thomas Byrne,
senior vice president for sovereign risk at Moody’s Investors
Service, said in an interview in Hong Kong on Nov. 6.

Between Thaksin’s ouster in September 2006 and Yingluck
assuming office in 2011, Thailand had four prime ministers.
During the period, Thai courts disbanded two parties tied to the
64-year-old tycoon and disqualified two prime ministers allied
to him. There has been major civil unrest including the closure
of Bangkok’s airport in 2008 and the occupation of a commercial
district in the capital by Thaksin supporters in 2010.

The Thai 10-year yield will rise to 4.5 percent in six
months, according to Pongtharin Sapayanon, the Bangkok-based
head of fixed income at Aberdeen Asset Management Plc, which
manages $312 billion globally. The baht will finish the year at
31.3 per dollar and then weaken to 31.6 by the end of the first
quarter, according to the median estimates of economists
surveyed by Bloomberg.

“It’s definitely not attractive to be putting a lot of
money into a country that has heightened risks,” he said in a
Nov. 4 interview. “ It’s safer to put money in other countries
which have a similar risk profile without the political
baggage.”